Facebook Economics

Edward Hugh has a lively and enjoyable Facebook community where he publishes frequent breaking news economics links and short updates. If you would like to receive these updates on a regular basis and join the debate please invite Edward as a friend by clicking the Facebook link at the top of the right sidebar.

Thursday, September 20, 2007

Bulgarian Inflation Accelerates

Bulgaria, which joined the European Union in January, recorded an annual inflation rate of 12 percent in August, the highest in the EU, pushing it further from its goal of joining the euro mechanism, and from entering a two-year currency stability test which was scheduled for 2008, and intended as a preparation for making the switchover to the common currency in 2010. This now seems to be a very unlikely eventuality and timetable.

Bulgaria, which is the EU's poorest country in terms of per-capita income, is struggling to contain rapidly rising wages and and handle the volume of inward investment which is arriving. Bulgaria's EU membership has spurred consumer spending, fueling imports and pushing up prices as people took out loans to buy cars, apartments and household appliances in a mad rush to try to bring living standards closer to those of western Europe. As a result, the current-account gap has widened to record levels and will exceed 18 percent of GDP by the end of the year, according to Standard & Poor's. All of this - including the low fertility and migrant outflows producing labour shortages at home - mirrors problems which are already being experienced in the Baltic states of Latvia, Lithuania and Estonia.

As with the Baltic currencies, the lev is pegged to the euro under a currency board system, and while this has helped to keep a lid on government spending and lower public debt to the current 20 percent of GDP level (one which is well below the 60 percent of GDP criteria required for euro adoption), the rigidities involved with currency pegs are now being generally exposed, as the countries involved are having great difficulty adjusting to the rapid burst of inflation, since the currency cannot be devalued.

Indeed it is hard to know what the Bulgarian government can do in the face of all this, since they have posted budget surpluses in each of the last 4 years.

For what it is worth, here is the monthly chart showing the recent evolution of the harmonised CPI.

No comments: